About this Author

College chemistry, 1983

The 2002 Model

After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases.
To contact Derek email him directly: derekb.lowe@gmail.com
Twitter: Dereklowe

December 3, 2008

Roche Stalls For Time

Posted by Derek

Remember back earlier this year, when the temperatures were high, the Dow was at 11,000, and Roche announced that they wanted to buy the rest of Genentech. So how’s that working out?

Not all that well, as far as can be told from the outside. This would take around 45 billion dollars, and 45 billion dollars is a sum that’s increasingly hard to borrow these days. According to Reuters, the prospects for Roche putting together a syndicated loan for that amount are “becoming increasingly remote”. I can believe it. That would surely be the largest deal going at the moment, and given the state of the credit markets, the terms would probably curl your hair if they did manage to float such a beast. And who’s willing to, even if they have that kind of capital sitting around?

For its part, Roche has been telling everyone that they’re still committed to buying Genentech, and that they’re completely confident of getting the financing together. Of course, they’ve been saying that since July, basically word for word, and as the months go on those repeated statements of confidence start to have the opposite effect. So if Roche really is committed and so on, what are they going to have to do?

Reach in and dig out more equity and cash, most likely. What else? Apparently the company is trying to avoid doing that, and they’re willing to leave things hanging until the situation improves. But if you can predict when people are going to be in the mood to lend that kind of money, well, you should be out there making a fortune on the Street with such insights. (I would be!) And if anyone tells you that they have the macroeconomic situation figured out for the next few months, ask them if they went short on oil futures back in the summer. You’d think that anyone with any kind of magic touch would have known enough to do that.

One consequence of all this is that people at Genentech have been living in a cloud of uncertainty for months now, and will stay there for the foreseeable future. That can’t be helping morale or productivity. And if there are any places for people to go, it’s also giving them plenty of time to find them. No, Roche’s timing, in retrospect, looks perfectly awful. When (and if) they finally get around to buying Genentech, what, exactly, will they have bought?

Update: a Genentech VP says that all this has had no impact on morale, actually. You can take that as you wish. . .as for me, I'd find that extraordinary, if it were true.

It's Business as usual at Genentech.... Why would that change? They still have things in the pipeline.... You think the scientists are just sitting saround playing online chess? Do you have a short on this stock?

No, I disclose it whenever I have a position on a company that I'm writing about, and I have none on Genetech. And I don't really want to see them get bought by Roche, either, I have to say.

And it's not the things in the clinical pipeline that worry me - it's what's happening back earlier than that, the things with a longer time frame. Those are the projects that are affected by uncertainty like this. I base these comments on having been in similar situations myself. . .

The recent doings have had their impact. One Genentech VP just turned down a position a little further down on the peninsula for which he had been heavily recruited and looked set to take--apparently, he no longer thinks Roche will be able to pull off the purchase. Recruiters have told me they've noticed a decline in interest in new positions from Genentechers generally in the last couple of weeks. The holidays? Maybe. Another interesting angle is what happens to the folks at Roche Palo Alto. That facility will disappear one way or another come the end of 2009 (I think that's the timeline that was announced), and Rochers in NJ are supposed to be moving out to California as part of the great Roche reorg. No one knows how that will work if Roche doesn't consummate the purchase of Genentech. It will be a major headache for Roche, however, a company not known for its HR prowess. (Ever hear the joke of how heaven and hell differ? In heaven, the British are the cops, the French the cooks, the Swiss run the trains, the Germans are the mechanics, and the Italians are the lovers. In hell, the British are the cooks, the French the mechanics, the Germans the cops, the Italians run the trains, and the Swiss are the lovers. Roche is a very Swiss company. I can only imagine the hell the company would go through if the Genentech purchase did not close.)

Translation: I'm still making money hand over fist, so I'm happy, and I don't talk to peons.

2) The magic of acquisitions rears its head - if you can't make money with your own businesses, what makes you think you can with someone else's? If you don't do anything with them but bank the money, then it's OK, but CEO's trying to justify their salaries can't just leave things alone - they have to appear to be doing something. (At least part of the incentive for expansion is the opportunity for CEO's to enhance their salaries and stock options - their salaries are supposed to correlate to company size.)

3) Considering that most of the recent large pharmaceutical company acquisitions haven't ended well for those acquired, it seems rational for Genentech employees to be worried about Roche buying them. It's possible that Roche could be different, but companies seem to feel their own people are off limits, and so if cuts come, they usually come from those acquired.

4) If anyone is looking to short Genentech, it's Roche - they were told that the original bid wasn't enough, and they probably can't even fund that offer. If the uncertainty lowers Genentech's stock value more than its productivity and revenue, Roche might get a better deal (assuming they can come up with anything close to $4.5e10.)

Well, if that VP had any credibility he lost it there. Scientists are not going to jump ship immediately, but judging by the number of G'tech CV's floating around these days and the fact that the company felt the need to put $371M into a retention plan morale can't be great.

I am a great admirer of G'tech and would consider working there. but now now.

In this case, I have to agree with Anonymous. Did you not have anything else to write about? There is nothing in this article that wasn't published in Reuters and picked up by every other news outlet except for your misleading and completely speculative final paragraph.

WCC, maybe I should have titled it "Derek Stalls for Time", instead? The point of the post was largely to call attention to the Reuters article, although I did try to add some speculation at the end. How that paragraph is misleading, though, I'm not sure - I'd welcome some corrective details, if you have some to provide.

I think the lack of interest in jumping ship stems from two things:
- It doesn't look like Roche can pull this off.
- The retention plan referenced above is working. You have to stick around until June '09 at a minimum to reap the rewards of the program.
That said, Genentech is still the place to be. Tell me someplace better?

I agree with the assessment of Anon2 and dont find it that hard to believe that folks are still reasonably happy and productive there. This deal is far from being done, despite what is being repeatedly said at the Roche, PA site.

DNA is still the top dog in the SFBA and many aspire to get there. From all accounts, it is a fantastic place to do science (and this contrasts starkly with what folks from PFE and GSK tell me). I dont think you make Fortune #1 best place to work by being a hell hole.

Due to the reality of the economy, it looks like this deal could be a ways off. So, who is to complain for another year of status quo at a great firm?

I think the bigger issue is morale at the Roche, PA site. The site is slated to close--but where will the scientists go? None I have spoken with are interested in a move to NJ. Folks like living in the Bay Area (I know I used to).

I do agree that when they are eventually completely owned by Roche, the Genentech as we know it will change for the worse. This is ultimately what happened at Syntex.

Disclaimer: I dont do any business with DNA and am not a holder of their stock. I also wish they would stay as they are, but Roche owning them outright, I think, is inevitable.

The tone of a few of these comments seems unnecessarily harsh to me. I've always felt that Derek is keenly sensitive to the plight of industrial chemists- we often find ourselves at the mercy of uncaring CFOs and stockholders- and it is probably not news to anyone that career uncertainty is particularly difficult for scientists because our projects can take years to reach fruition. The term "paralysis" is an apt one, in my experience.

Personally, the important thing about this post (and the ones about layoffs at GSK, Pfizer, etc.) is that they provide a forum for the affected scientists to describe what they're seeing on the inside, not for the purposes of insider trading, but for the purpose of helping the rest of us understand what is REALLY happening when one of these companies announces "cost-cutting measures." I have a lot of friends at a lot of the aforementioned companies, and on more than one occasion Derek's blog has prompted me to check in to see if I can help out. Keep it up Derek, and thank you!